1. TRANSPORTATION MANAGEMENT
Industrial Logistics (BPT 3123)
Industrial Technology Management Programme
Faculty of Technology

2. Chapter Outline Introduction Government’s Role in Transportation
Transport Functionality and Principles
Participants in Transportation Decisions
Transportation Modes
Carrier Types
Transportation Economics

3. Lesson Outcomes Understand transport functionality and principles
Describe how managers choose transportation modes and carriers
Explain transportation economics

4. Introduction
Customer service level and geographic location play vital role in transportation decisions
Shipments sizes, routing and scheduling of equipment are key in effective management of the firm’s transport strategy
All governments realize that a stable and efficient transportation system is vital to economic development

5. Government’s Role Economic Regulation Safety Regulation
Government controls of the entry, rates and services provided by transportation carriers
Economic Regulation
Regulation designed to ensure that transportation carriers conduct their activities in safe and responsible manner
Safety Regulation

6. Transportation Functionality
Product Movement
Basic value provided by transportation is to move inventory to specified destination
Product Storage
While a product is in a transportation vehicle, it is being stored – storage at shipment origin or destination

7. Product Movement
Primary function is the movement up and down the value chain
The movement of materials should take place only when it enhances product value
Objectives:
To move product from an original location to prescribed destination while minimizing temporal, financial and environmental resource costs
To minimize expenses incurred due to loss and damage
To meet customer demand regarding delivery and shipment information availability

8. Product Storage
Temporary storage becomes advantageous as the cost of unloading and reloading the product in a warehouse may exceed the daily charge of storage in transportation vehicles
Where the warehouse space is limited, utilizing transportation vehicles may become a viable option

9. Principles of Transportation
There are 2 fundamental economic principles that impact transportation efficiency:
Economy of scale – is the cost per unit of weight decreases as the size of a shipment increases
Eg.: large capacity transportation vehicle such as rail or water are less expensive per unit of weight than smaller capacity vehicles such as trucks or air
Economy of distance – refers to decreased transportation cost per unit of weight as distance increase
Eg.: a shipment of 800km will cost less to perform than 2 shipments of the same weight each moving 400km

10. Participants in Transportation Decisions
Goods Flow
Public
Information Flow
Government
Shipper
Carrier
Consignee

11. Modes of Transportation
Transportation Modes
Modes of Transportation
Rail
Highway
Water
Pipeline
Air

12. Operating Characteristics*
Transportation Modes
Operating Characteristics*
Truck
Rail
Water
Pipe
Air
Speed 2 3 4 5 1
Availability
Dependability
Capability
Frequency
Cost to Shippers**
Typical Uses
medium & light mfg.; wholesale & retail distribution
heavy bulk commodities
bulk commodities; agriculture products
petroleum; natural gas
small shipments; emergency shipments
* 1 = best; 5 = worst
** 1 = highest cost; 5 = lowest cost

13. Carrier Types
Common carriers – transportation companies that provide service to the public
Contract carriers – carriers that have specific contracts with a limited number of shippers
Private carriers – companies that own and operate transportation equipment to transport their own products

14. Transportation Economics
Consolidation is one of the strategy used by logistics management to reduce transportation cost by combining small orders or shipments into one larger shipment.
Market Area Consolidation – combining several small shipments from one shipper that are going to the same market area into one shipment
Pooled Delivery Consolidation – combines small shipments from different shippers that are going to the same market area; normally handled by independent transportation companies
Scheduled Delivery Consolidation – establishing specific times when deliveries will be made to customers

15. Transportation Economics
Influenced by the following elements:
Distance – directly contributes to variable cost such as labour, fuel and maintenance
Volume – cost per unit of weight decreases as load volume increase
Density – incorporates weight and space considerations; an individual vehicle is constrained more by space than by weight
Stowability – refers to product dimensions and impact of the same on vehicle space utilization
Handling – special handling equipment that may require
Liability – refers to the product characteristics that affect the risk of damage and the resulting claims
Market Factors – imbalances in manufacturing and consumption locations

16. Transportation Economics
Transportation decision involves several factors : the cost related to transportation itself, the cost of inventory while in transit and the service requirements related to speed, availability etc.
To calculate transportation cost:
Total Cost = In-Transit Inventory Holding Cost + Carrier Cost
 where In-Transit Inventory Holding Cost
= (no. of days in transit / 365) x shipment value x annual inventory carrying cost percentage
Example :
Ajib’s glass store needs to ship an order of five chandeliers to a builder about 1000 miles away. The chandeliers cost about RM5,000 each, and Ajib will be paid upon delivery. Ajib plans to ship the order by truck at a cost of RM250. the delivery will take 5 days. Ajib uses a 20% annual inventory carrying charge with an operating schedule of 365 days per year. What will be the approximate total shipping and transit inventory cost of the shipment?

17. Transportation Economics
Solution: In-Transit Inventory Holding Cost = (no. of days in transit / 365) x shipment value x annual inventory carrying cost percentage = (5 days / 365) x RM25,000 x (0.2) = RM So, Total Transportation Cost = In-Transit Inventory Holding Cost + Carrier Cost = RM RM 250 = RM

18. Transportation Economics
Exercise
You are shipping 200 diamonds to a customer located 2,000 km away. The average value of the diamonds is RM1,500. you can ship via air for RM500 and the diamonds will arrive in 2 days or you can ship via a specialty ground carrier for RM200 and the diamonds will arrive in 6 days. You figure your inventory carrying cost is 25%. Your customer will immediately transfer funds to your bank account on receipt of the shipment. What is your total cost if you use either the ground carrier or air carrier?

19. Transportation Economics
Market related factors influencing transport costs:
The degree of intra-mode and inter-mode competition
The location of markets
The nature and extent of government regulation
The balance and imbalance of freight traffic in a market
Seasonality of product movement
Whether the product is being transported domestically or internationally

20. Summary
Economies of scale and distance offer opportunities to lower cost through consolidation in transportation management
The transportation modes each have significant advantages and disadvantages, which makes the choice of transportation service a complete decision